Question

Answer 1

Requirement (a)

Determine the number of rentals and the sales revenue Jane needs to break even using the contribution margin technique:

Break even number of rentals = Fixed cost / Contribution per unit

Fixed cost is ($60,000 + $41,000 + $24,000 + $10,000) = $135,000

Contribution is ($60 – ($10+$5)) = $45

Break even number of rentals is ($135,000 /$45) = 3,000

Break even sales is (3,000 *$60)                = $180,000

 

Requirement (b)

Calculation of the current level of rentals is 4,000 by what percentage can rentals decrease before jane has to worry about having a net loss:

Margin of safety = (Budgeted sales – Break even sales) / Budgeted sales

Break even sales = 3,000

Budgeted sales = 4,000

Margin of safety is (4,000 – 3,000) / 4,000 = 25%

 

Requirement (c)

Calculate the break even number of rentals and break even sales if cost is increased and selling price also increased:

Break even number of rentals = Fixed cost / Contribution per unit

Fixed cost is ($60,000 + $41,000 + $24,000 + $10,000) = $135,000

Contribution is ($68 – ($10+$5+$3)) = $50

Break even number of rentals is ($135,000 /$50) = 2,700

Break even sales is (2,700 *$68)                = $183,600.